13 - Chapter 5

CHAPTER – V
ANALYSIS OF DOCUMENTARY CREDIT METHOD

WITH RESPECT TO UNIFORM CUSTOM PRACTICES FOR
DOCUMENTARY CREDIT: ICC 600-UCP 2007 REVISION
5.1 VARIOUS STEPS INVOLVED IN OPERATIONS OF

DOCUMENTARY CREDIT
5.2 UCP 600 AND DOCUMENTARY CREDITS: AN ANALYSIS

A Critical Study of International Trade Settlement Methods in Post Globalization Era
CHAPTER V: Analysis of Documentary Credit Method with

reference to Uniform Custom Practices for Documentary Credit:
ICC-600, U.C.P. Revision 2007.
In the preceding chapter the researcher has made comparative analysis of

available cross border trade settlement methods and observed that LC has been widely
accepted and most popular method of trade settlement. It is therefore inferred that
statistics related to disputes presented earlier pertains to a large extent to
Documentary Credit method
In view of this the researcher, considered it necessary to probe further into

Documentary Credit Method governed by clauses in the publication of International
Chamber of Commerce under title UCPDC 600, ICC 2007 Revision.
The organization of the chapter is as follows:
I. To study the various steps involved in operations of Documentary Credit
II. UCP 600 and Documentary Credits : An Analysis
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5.1 To Study the Various Steps Involved in Operations Of Documentary

Credit:
A. Flow Chart of Letter of Credit
B. Description of various steps involved in Letter of Credit

mechanism
C. Advantages and Disadvantages of LC
D. Types of Letters of Credit
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A. Flow Chart of the Letter of Credit Mechanism:
The very mechanism of Letter of Credit, along with roles and

responsibilities assigned to various parties to the Letter of Credit are based on the
guidelines comprising of various clauses issued by ICC from time to time. The
latest revision brought out by ICC is Publication No. 600, 2007 revision,
comprising of 39 clauses controlling mechanism of LC. Since the reproduction of
clauses is prohibited the researcher in order to grasp the actual mechanism,
initially has presented flow chart of Letter of Credit followed by various steps
required to be taken by the opener of the Letter of Credit.
Before giving flow chart it is pertinent here to state the very definition of
Letter of Credit
Definition of Letter of Credit:
As per clause number 2 of Uniform Custom Practices for Documentary

Credits, UCP 500, and I.C.C. 93 revision.
“Any arrangement however named/ described whereby the banker (Issuing

Bank) acting at the request of and as per instructions of his own customer or on its
own behalf, is to make payment to or to the order of third party (beneficiary) or
authorities (another bank) to effect such payment and/or to accept and pay such bill of
exchanges or authorizes another bank to negotiate provided terms and conditions of
the letter of credit are strictly complied with”
All above in simple terms means “Banks conditional undertaking to make

payment”
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LC Mechanism Flowchart:
A. Description of various steps involved in Letter of Credit

mechanism:
Step-1:
The exporter and importer have entered in to the cross border trade contract.
The nature of contract is about the flow of goods from exporter to importer and
correspondingly flow of foreign currency (money )from the importer to the exporter
.It is only when these 2 flows are complete ,we say that there is a settlement of the
cross border trade transaction .Toward early settlement flowing methods are
available:
I. Open Account
II. Advanced payment
III. Documentary Credit
IV. Documentary collection
V. Consignment
VI. International Trade Guarantees
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Out of all above 5 methods both parties have mutually agreed to opt (go for)
documentary credit /letter of credit as a method of cross border trade settlement.
Step-2:
Accordingly exporter who is a beneficiary of credit requests importer to open a

letter of credit in favor of the exporter .in order to open a letter of credit importer
(applicant) of LC approaches his banker (opening banker) with a request to open a LC
in favor of exporter (beneficiary ). The banker while opening LC insists upon
following documents:
I. LC application form
II. Firm order
III. Relevant clause declaration
IV. Margin /Deposit
V. License ( if required )
The banker will carefully go through these documents and if satisfied about
credentials of the importer may open a LC. However at times due to some political
/sociological factors (rivalry between applicant and beneficiary’s countries )banker
may not agree to open LC even though applicant has fulfilled all conditions and
submitted all above documents .
Step-3:
The LC opened is to be forwarded to beneficiary. However the LC opening

banker forwards same not directly but through another bank which is called as
advising bank. As per clause-the role of advising bank is to confirm the authenticity
/of the LC genuineness of the instrument titled LC. The advising bank is generally
from the exporter’s country.
If an advising bank takes an additional responsibility of effecting payment

over and above determining authenticity then such advising bank is called as
confirming bank. In that case the advising bank steps into the shoes of LC opening
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bank and documents will be sent to such advising bank for scrutiny and payment. The
reimbursement for which will be claimed from opening banker only.
The above confirmation is asked of by the exporter when he doubts the

capacity of the banker to fulfill the commitment .It should be noted that adding
confirmation is not obligation for the advising bank.
Step -4:
The LC so received duly confirmed /authenticated is taken up by the exporter for

further processing of LC. By processing we mean collecting documents evidencing
performance .the documents so collected are of following types:
i. Financial documents
ii. Commercial documents
iii. Transport documents
iv. Risk bearing documents
v. Other documents
All such a documents tied together makes an export bill which is forwarded to
exporter’s bank for negotiation.
Step-5:
In simple terms negotiation means bill discounting or financing of export

transaction at post shipment stage. The exporter’s bank may or may not negotiate. In
either case the export bill is sent to the LC opening banker for final payment.
If exporter’s bank decides to negotiate the bill then it will make detailed scrutiny of
the bill and ensure compliances to terms and conditions of the LC. If documents are in
order the exporter bank would effect the payment and forward the bill to the LC
opening bank with reimbursement claim. It is pointed out here that the decision to
negotiate is not binding / compulsory .As per the latest clause simply by agreeing to
negotiate constitutes negotiation whether financing has been done or otherwise.
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Step-6:
Whether negotiated or otherwise documents are received at the counters of the

LC opening bank for final payment. The LC opening bank would make detailed
scrutiny of the documents as per terms and conditions stated in the LC application
form. If documents are in compliance to the terms and conditions of the LC ,
means exporter has performed and therefore importer’s bank has to either
effect the payment as per commitment /promise / undertaking or honor the
reimbursement claim if any lodged by exporter bank .
Here, it is pointed out that the LC opening banker effects the payment and
later on draws (debit) on importer’s account which means irrespective of the fact that
whether importer maintains sufficient balance or otherwise the payment made to the
exporter cannot be in any case called back it is in this sense commitment on the part
of importer’s bank.
Before effecting the payment the LC opening banker makes detailed scrutiny
of the documents and ensures that documents are in compliances to the terms and
conditions of LC .As per UCPDC article 14 clause (B) five working days following
the day of presentation have been provided to make the scrutiny of documents.
In case documents are found to be discrepant (performance is not shown) then steps to
be followed (article 16) are as under:
a) The issuing bank on its sole judgment finds that documents are not in
compliance, then may approach the applicant for waiver of the discrepancy.
b) If issuing bank decides to refuse to honor it must be a single notice to that
effect to the presenter and notice must state following:
i. Banker is refusing to honor or negotiate
ii. Clearly state discrepancy due to which banker is refusing to honor or
negotiate
iii. Banker is holding documents until waiver is received from the
applicant
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iv. Banker is returning the documents
All the above steps have to be followed with the help of fastest telecommunication
means not later than 5th banking day following the day of presentation of documents.
If issuing bank fails to act in accordance to the above provisions then , it shall be
precluded from stating that documents are not in compliance to the terms and
conditions .
Step -7:
Now if documents are in order then following procedure is required to be

followed for the D/P i.e ” SIGHT bills “(deliver documents against payment ) and
D/A i.e “USANCE” bills (deliver documents against acceptance ).
D/P and D/A procedure:
In case of D/P bills if the documents are found to be in order then, banker (L/C
opening banker) as per commitment has to effect payment to the exporter and later on
debits importer’s account it is pointed out here that so long as documents are in order
the payment made to the exporter cannot be called back hence, importer’s banker
would not release documents unless and until debit is adjusted. As an extreme case if
the importer declares insolvency or debit drawn remains and unadjusted then , banker
would clear the goods by taking documents to the port and sell this goods in the
domestic market and thus recovers the money paid to the exporter . In financial terms
it is called as floating charge over the goods and under any circumstances the banker
would not release the charge (documents) unless debit gets existed.
As against this in case of D/A bills risk is relatively higher as banker has to
release documents that is release the charge and debit will be drawn only on due date
of the bill . the risk here is on due date if documents are in order exporter would get
payment and banker in the event of debit not getting adjusted cannot exercise charge
over the goods . for the obvious reason that document are released therefore as per
procedure , USANCE bill of exchange wrong is required to be got accepted for
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payment on due date by the importer and such accepted bill of exchange is held with
the banker . On due date If importers fails to maintain balance then , the banker will
file a case against importer for liquidation of security by producing accepted bill of
exchange as an evidence of having agreed to pay the bill on due date .
Step – 8:
The importer on getting documents duly endorsed from the banker, would go to the
port and clear the goods. (The endorsement is required as bill of lading is in the name
of banker as a consignee and titled the goods has to be transferred to the importer.)
The exporter has already received the payment from the bank as per commitment thus
the banker assures payment to the exporter and performance to the importer.
Step – 9:
In India balance of payment is showing a chronic deficit that is importers are greater
than exports which means demand for foreign currency is more than supply. If the
exporter is Indian, then through exports he has helper country in bringing foreign
exchange, therefore, some kind of incentives is given to the Indian exporters. The
incentive is in form of cash and for that exporter has to approach through his banker
to joined chief controller of import and export. (Joint CCIE). Generally cash incentive
is in the form of percentage of the category of goods exported.
Step – 10:
Out of the all methods of trade settlement available, the documentary credit
method is most popular one in the cross border trade transactions. It is observed that
more than 75% cross border trade is settled through DOCUMNTED CREDIT (Letter
of credit) mechanism only. In spite of advantages of L/C, there are many cases which
are under dispute and referred to ICC to redress disputes.
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B. Advantages and Disadvantages of LC
 Advantages of LC:
a. The Letter of credit is a commitment to importer and exporter in the sense

that importer is assured of performance and exporter is assured of payment
and therefore mutually advantageous.
b. The very fact that the LC opening banker has acceded to the request of
importer is sufficient to establish credentials of importer.
c. The LC mechanism is such that exporter would get payment if documents

are in order and importer’s account get debited at later stage till that time it
is as good as issuing bank has financed the transaction and therefore LC is
import financing mechanism as well as exporter get his documents
negotiated at post shipment stage and thus gets finance which is an export
finance defined as financed against receivables in the form of documents.
 Disadvantage of LC:
a. In the whole process of LC mechanism the banker deals in documents and

not goods which means performance is determined on the basis of papers
only and actual goods may turn out to be different from the description of
goods. In that case, importers account will get debited and goods that he
would receive are not up to his expectations. The banker would never
recredit account of the importer because documents are in compliance to
the terms and conditions of L/C. Thus the banker in absolved of its liability
to pay in case goods is defective. Thus importer has no recourse with the
banker and has to settle the issue directly with the exporter, who has made
breach of trust.
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b. The scrutiny part has to be done very scrupulously failing which issuing
bank cannot claim that documents are not in order and payment made to
the exporter cannot be called back.
c. The commitment charges are relatively heavy as compared to the other

methods of credit settlement.
d. The LC mechanism do not give any protection to either parties in covering

foreign currency risk and importer or exporter have to bear additional cost
of entering into derivative contracts .
C. Types of Letters of Credit:

The following are types of Letter of Credit. The types depends upon nature
and function of the credit. The characteristics of these types of credit can be
well understood if we consider these credits in following pairs:
1. Revocable/Irrevocable Letter of Credit:

2. Sight and Usance Letter of Credit
3. Confirmed and Unconfirmed Letter of Credit
4. Red and Green Clause Letter of Credit
5. Transferable and Non Transferable Letter of Credit
6. Back to Back Letter of Credit
In addition to above there are following types like Deferred Payment,
Acceptance Negotiation, Transit and Reimbursement Credit
1. Revocable/Irrevocable Letter of Credit:

Revocable credit is the one, which can be revoked unilaterally any time
without consent of parties to the credit, such credit is meaningless in the sense
that any of the parties can cancel or revoke credit and therefore proves
detrimental to other parties.
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Actually the revocable credit has lost its significance and earlier term
under Article 6, of UCP 500 stating that Letter of Credit must indicate whether
it is revocable or irrevocable stands withdrawn in the latest version of ICC.
Which states that all credits must be irrevocable.
As against this irrevocable credit is the one which cannot be revoked

under any circumstances. If any changes are required then these changes come
in the form of amendments to the original terms and conditions of the credit.
However for such amendment to become effective the consent of all parties is
must and in this sense credit is irrevocable in nature.
In practice it is observed that original terms and conditions are

sometimes required to be revoked and such revocation in the form of
amendment has to be got accepted.
From exporters point of view irrevocable credit is most favorable. The

question arises why to make such distinction when provision of revocable
credit is no longer accepted. The answer is when Letter of Credit is of
irrevocable type then theoretically there should be revocable credit and
therefore justifies classification between revocable and irrevocable types,
though revocable has no practical relevance today.
2. Sight and Usance Letter of Credit:
The Sight Credit is also known as Documents against Payment DP

whereas Usance Credit is called as Documents against Acceptance DA. In
case of Sight Payment it is made on demand against presentation of stipulated
set of documents subject to compliance of Terms and Conditions of LC. In
Case of Usance drawing of Demand Draft / Bill of Exchange for agreed
Usance Period is a pre-condition.
It is clear that such bifurcation is based on whether goods are sold on

Cash or Credit basis. In case of Usance Credit acceptance is taken on
adhesive stamp paper under Indian Stamp Act.
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In case of India such stamp duty is exempted for usance period upto 90
days.
3. Confirmed/Unconfirmed Letter of Credit
The letter of Credit in simple terms is defined as “conditional commitment to

pay” by the opening banker the condition relates to actual terms and
conditions of the credit laid down by the importer while opening LC and
Opening Banker is committed to pay the amount mentioned in the LC
provided these terms and conditions are strictly complied with.
Suppose LC of one million dollar is opened by very small bank. It

means beneficiary i.e. exporter is assured of payment to the tune of one
million dollar by such small LC opening banker. Obliviously exporter
beneficiary may have doubt about capacity of such small bank to fulfill its
promise/commitment/undertaking to pay one million dollar, in that case the
beneficiary exporter may request importer to get the credit confirmed by some
other bank i.e. advising bank preferably from the exporter’s country as the
advising bank has originally advised the credit to the exporter. In case advising
bank agrees to confirm the undertaking of LC opening banker to pay one
million dollar then such credit becomes a confirmed letter of credit. However
it is pointed out that advising bank is not obliged to confirm the original credit
and hence adding confirmation to LC is a discretion of advising bank.
Generally advising bank becomes a confirming bank otherwise rarely

some other banks comes into the pictures and agrees to confirm original Letter
of Credit.
In case of confirmed LC’s documents would be scrutinized by the

confirming bank itself and payment would be effected as per the commitment
here it is said that confirming bank stepped into the shoes of opening banker.
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The confirming bank on making payment would claim reimbursement

from the LC opening banker. The credits which are not confirmed are called as
unconfirmed Letter of Credit.
4. Red Clause and Green Clause Letter of Credit:
The other name given to Red and Green Clause LC is “Anticipatory

Credit”. Actually the nature of the LC mechanism is such that payment is
made on submission of documents complying terms and conditions of LC i.e.
at Post Shipment stage. However at times exporter may require raw material to
convert into finished goods which in turn are exported. However in order to
acquire raw material exporter needs finance i.e. finance at pre shipment stage
and for that exporter would insist upon the importer to incorporate a clause in
the Red authorizing LC negotiating banker to finance the exporter towards
purchase of raw material. The negotiating bank may disburse finance to the
exporter on the basis of Red Clause incorporated in the original LC. The
exporter later on converts this raw material into finished goods and again
applies for finance at Post Shipment stage, which is disbursed only after
liquidating previous Pre Shipment credit.
At times exporter insists upon finance at pre shipment stage not only
for the purchase of raw material but also for warehouse and insurance charges.
In that case Green Clause comes into effect authorizing negotiating banker to
provide finance at pre shipment stage not only towards procuring, processing
and packaging and also warehousing and insurance charges, pending
availability of the ship, therefore it is said that the green clause is an extended
version of Red Clause.
The name anticipatory means in anticipation of shipment and

subsequent presentation of documents the credit is disbursed. Thus Red and
Green Clause LC is a classic example of Pre Shipment Finance.
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5. Transferable Credit and Non Transferable Letter of Credit:
Transferable credit as the name suggests indicates that the original

amount of the credit can be transferred to more than one beneficiaries. All
other beneficiaries are called second beneficiaries which means horizontal
transfers are only permitted and vertical transfers are not allowed e.g. if LC is
opened for fifty thousand dollars in favour of original beneficiary then amount
can be transferred to more than one beneficiary making total fifty thousand
dollars. The transferable credit is opened only when it is explicitly mentioned
in the original terms and conditions that “Credit is Transferable”, otherwise it
becomes nontransferable credit.
6. Back to Back Letter of Credit:
As the name indicates one credit i.e. principle credit is backed by or

secured by another credit.
In cross border trade transactions the exporter may not be a

manufacturer but acts as agent or intermediary who might have bagged an
order to supply certain goods to foreign buyer. In order to secure payment and
performance foreign buyer opens a Letter of Credit in favour of the
intermediary. Now in order to supply goods or export goods such intermediary
may have obtained goods from domestic or some other market. In that case
intermediary opens a Letter of Credit in favor of the original supplier against
the security i.e. backing of credit already opened in his favour. Thus back to
back credit is a credit opened by a middleman in favor of the actual supplier
and the need for such credit arises when beneficiary as a middleman would not
want or disclose the name of the original supplier. Interestingly the banker
plays a crucial role in replacing documents i.e. camouflage so as not to divulge
the name of the original supplier.
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7. Acceptance Credit:
As name implies in this credit it is obligatory to draw Bill of Exchange

and same should get accepted. The payment will be made on accepted draft.
8. Restricted Credit:
In this credit the negotiations are restricted to a specified bank authorized

to negotiate and exporter is required to submit documents to such specified
bank only such arrangements are between opening bank and specified
negotiating bank to develop their business relations.
9. Negotiation Credit:
The negotiation credits are of two types “Freely Negotiable” and

“Restricted for Negotiation Credit”. In case of former any bank is authorized
to negotiate whereas in case of later negotiations are restricted to that bank
only whose name has appeared in the credit. In case negotiating banker refuses
or do not agree to negotiate then responsibility of issuing bank to effect the
payment.
10. Revolving Credit:
As name suggest once the payment under LC is made or drawing is done

the credit reverts to the original amount and available to the beneficiary duly
reinstated to the original amount.
11. Instalment Credit:
In such credit unlike simple credits which allows partial shipment. Full
value of the credit is allowed is allowed to be shipped at stated period and
intervals. The important point is in case any of the installment is lapsed the
credit ceases to be available for further installments.
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12. Transit Credit:
In case of transit credit the advising bank is neither from buyer’s country
nor from seller’s country. Such credit is required when issuing bank has no
correspondent relationship with any bank in the country of beneficiary.
13. Reimbursement Credit:
It is opened when invoicing is done in the currency neither of applicant’s

or beneficiary’s country and hence the name reimbursement credit where
actual reimbursement comes from third party.
5.2 UCP 600 and Documentary Credits : An Analysis
The Uniform Customs and Practice for Documentary Credits (UCP) is a set of
rules governing credits drafted by the International Chamber of Commerce (ICC) The
UCP is periodically reviewed and updated by the ICC Banking Commission. As of 1st
July 2007 the new revision of ICC has come into force under UCP 600 which is
presently in vogue. (The entire analytical part of the research carried out considers
these latest provisions with a caution that the clauses cannot be reproduced due to
reservation right of ICC) The further part of the chapter focuses upon interpretation
and analysis of various clauses of ICC, so as to provide basis to understand and
interpret clauses in a proper manner and perspective.
Analysis of Clause 1: APPLICATION OF UCP
 UCP 600 applies only when referred to

“They are binding on all parties thereto unless expressly modified or excluded
by the credit”
 UCP is the default standard
 UCP 600 can still be used for Standbys.
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Analysis of Clause 2: DEFINITIONS
 Contains “Definitions” –A new concept for the UCP

 Previous UCP revisions did contain common trade words/phrases but did not
expressly define the terms.
 Now definitions are prepared for: “Advising Bank”, “Applicant”, “Banking
Day”, “Complying Presentation” ,”Confirmation”, “Confirming bank”,
“Credit”, “Honour”, “Issuing Bank”, “Negotiation”, “Nominated Bank”,
“Presentation” and “Presenter” are available.
 Definitions for documents and transfers are dealt with separately.
 E.g. Honour Means:
a) to pay at sight if credit is available by sight payment
b) to incur a deferred payment undertaking and pay at maturity if the
credit is available by deferred payment
c) to accept a bill of exchange (“draft”) drawn by the beneficiary and
pay at maturity if the credit is available by acceptance
 Nominated Bank Means:

The bank with which credit is available or any bank in the case of a
credit available with any bank.
 Negotiation means:
The purchase by the nominated bank of drafts (drawn on a bank other
than the nominated bank) and/or documents under a complying
presentation, by advancing or agreeing to advance funds to the
beneficiary on or before the banking day on which reimbursement is
due to the nominated bank
 Presentation Means:
Either the delivery of documents under a credit to the issuing bank or
nominated bank or the documents so delivered
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Analysis of Clause 3: INTERPRETATIONS
 “Interpretations” were collected and put into this single article.

 Interpretations had been originally stated in former Articles 2, 20, 46 and 47
and some new ones were added.
 One of the new interpretations contains a major change, i.e. that all credits are
irrevocable even if there is no indication to that effect. Revocable LC’s are no
longer discussed.
Other new Interpretations:
 Word “between” has been added to shipment period(includes dates

mentioned)
 Added “from” and “after” to define maturity dates(excludes the date
mentioned)
 Please notice that the word “from” is defined differently 1) for SHIPMENT
(includes date mentioned) and 2) for maturity (excludes the date mentioned).
Analysis of Clause 4: CREDIT VS CONTRACTS
 Contains old Article 3 with slight changes in the wording.

 New paragraph was added dealing with any attachments to the LC’s,
i.e. copies of contracts, proforma-invoices and the like should be
discouraged.
Analysis of Clause 5: DOCUMENTS VS GOODS, SERVICES,

PERFORMANCE
 Former Article 3 with slight changes in the wording. It is now ensuring that
banks are limited to only dealing with documents. Banks do not become
responsible for the goods, services and/or performances to which any
document relates.
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Analysis of Clause 6:
AVAILABILITY, EXPIRTY DATE AND PLACE OF PRESENTATION
 Availability, expiry date and place for presentation are now covered in this
article.
 Pieces of former Articles 9, 10 and 42 have been combined into this new
article.
 Clarifies problems with drafts drawn on an applicant. Credit must not be made
available against drafts drawn on the applicant.
 “Freely negotiable” no longer used. Now credit is “available with any bank”.
 Expiration date for Negotiation or Honour will be deemed to be an expiration
date for “PRESENTATION”
Analysis of Clause 7: ISSUING BANK UNDERTAKING
 Contains all obligations of the issuing bank.

 Reference to defined expressions like “honor”, “complying presentation”, etc.
Provides clarity and lists all responsibilities of the issuer.
 Clarifies situations when the issuing bank is obligated to reimburse.
 Concept that issuing bank must reimburse at maturity a nominated bank who
has honored or negotiated a complying presentation under a credit available by
acceptance and/or deferred payment, whether or not the nominated bank has
prepaid or purchased before maturity.
Analysis of Clause 8: COFIRMING BANK UNDERTAKING
 Contains all obligations of a confirming bank.

 Reference to defined expressions like “honor”, “complying presentation” etc.
 Clarifies situations when a confirming bank is obligated to reimburse.
 Separates reimbursement obligation towards banks from payment undertaking
in favor of beneficiaries.
 As in UCP 500, if not prepared to add confirmation must notify the I/B
without delay and may advice credit to beneficiary.
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Analysis of Clause 9: ADVISING OF CREDITS AND AMENDMENTS
 Contains all obligations of an advising bank in the same article.

 The often used term of “without engagement” is now defined as “without
undertaking to Honour or negotiate”.
 Term “reasonable care” no longer exists.
 States provides the concept of the second advising bank.
Analysis of Clause 10: -AMENDMENTS
 Deals with amendments under credits former sub Article 9d.

 Now indicates that partial acceptance of an amendment will be deemed to be
notification of “Rejection” of the amendment.
 New rules stating that provisions where the amendment will automatically
enter into force unless a beneficiary rejects within XX days. Etc. will be
disregarded.
Analysis of Clause 11: -
TELETRANSMITTED AND PRE-ADVISED CRESITS AND AMENDMENTS
 Contains former Article 11 and deals with teletransmitted and pre-advised

credit and amendments.
 Authenticated teletransmission will be deemed to be the “Operative” credit or
amendment. Any mail confirmation will be disregarded.
 Further expands “pre-advise” concept and mandates a full operative credit
and/or amendment must follow.
Analysis of Clause 12: NOMINATION
 Deals with rules on nominated banks’ obligations which are substantially

identical to those contained in former Article 10 c.
 Indicates that if an issuer nominates a bank, it is authorizing that bank to
prepay or purchase a draft accepted or a deferred payment incurred by the
nominated bank.
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 This now places the responsibility on the APPLICANT to know their

customer.
Analysis of Clause 13: BANK TO BANK REIMBURSEMENT

ARRANGEMENTS
 Covers reimbursement arrangements. Formerly Article 19.

 Now defines that the ICC rules for bank-to-bank reimbursements, URR525,
must be stated in the LC, for them to apply.
 Otherwise, default reimbursement rules are those stated in Article 13.
 Reimbursement bank charges now for the Issuing Bank unless otherwise
stated.
Analysis of Clause 14: STANDARED FOR EXAMINATION FOR

DOCUMENTS
 Deals with examination of documents as stated in former Article 13 with some

substantial changes.
 Includes parts of former Articles 21, 22, 30, 31, 37 and 43.
 Include some new rules that were covered under the ISBP.
 New wording describes the concept of “reasonable” without mentioning the
word “reasonable”.
 b. A nominated bank acting on its nomination, a confirming bank, if any and
the issuing bank shall each have a maximum of five banking days following
the day of presentation to determine if a presentation is complying. The period
is not curtailed or otherwise affected by occurrence on or after the date of
presentation of any expiry date or last day for presentation.
 c. A presentation that includes one or more original transport documents
subject to Articles 19, 20, 21, 22, 23 and 24 or 25 must be made by or on
behalf of the beneficiary not later than 21 calendar days after the date of
shipment as described in these rules, but in the event, not later than the expiry
date of the credit.
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Analysis of Clause 15: COMPLYING PRESENTATION
 Contains actions for issuing bank, confirming banks and nominated banks that
take their nomination, after determining whether documents are in compliance
or not.
 Discusses when to mail documents.
Analysis of Clause 16: DISCREPANT DOCUMENTS, WAIVER AND NOTICE
 Contains refusal messages wording and respective delivery options (contains

parts of former Article 14).
 There is no longer a need to reference: “payment under reserve”.
 Discusses an issuer’s ability to receive a refund, with interest when valid
refusals are provided against documentary presentations.
 C. when a nominating bank acting on its nomination, a confirming bank, if
any, or the issuing bank decides to refuse to honor or negotiate, it must give a
single notice to that effect to the presenter.
 The notice must state:
 i. that the bank is refusing to honor or negotiate; and
 ii. each discrepancy in respect of which the bank refuses to honor or
negotiate; and
 iii. a) that the bank is holding the documents pending further instructions from
the presenter ; or
 b) that the issuing bank is holding the documents until it receives a waiver and
agrees to accept it, or receives further instructions from the presenter; or
 c) that the bank is returning the documents; or
 d) That the bank is acting in accordance with instructions previously received
from the presenter.
88
Analysis of Clause 17: ORIGINAL DOCUMENTS AND COPIES
 Contains part of former Article 20

 Contains specific rules on what is an original document.
 States that one original of each document stipulated in the credit must be
presented.
 An original of a document will suffice as a copy.
Analysis of Clause 18: COMMERCIAL INVOICE
 Contains rules for commercial invoices and contains substantially what has
been governed in the former Article 37.
 Issued by beneficiary.
 Made out in the name of Applicant
 Need not be signed.
 NEW: Must be in the same currency as the credit.
 Transport Articles
 Traditionally, the B/L appears to remain the most contentious of trade
documents.
 The current redraft has taken into consideration issues not previously
covered and in addition, covers those topics where requests for ICC
opinions were sought.
 Forwarded Documents
 Transport Documents issued by Freight Forwarders or currently UCP
500 Article 30 is deleted.
 30 countries voted for its removal while 7 countries objected
 In the current draft, there is no equivalent
COVERING AT LEAST TWO DIFFERENT MODES OF TRANSPORT
 First of the Articles dedicated to transport documents. Starts with multimodal

transport documents, formerly covered under Article 26.
89
Analysis of Clause 20: BILL OF LADING
 Deals with ocean/marine bills of lading, as reflected in former Article 23.

 a. iii. Indicate shipment from the port of loading to the port of discharge stated
in the credit.
 If the BL does not indicate the port of loading stated in the credit as the port of
loading, or if it contains the indication “intended” or similar qualification in
relation to the port of loading, an on board notation indicating the port of
loading as stated in the credit, the date of shipment and the name of vessel is
required. This provision applies even when loading on board or shipment on a
named vessel is indicated by pre-printed wording on the BL.
Analysis of Clause 21: NON-NEGOTIABLE SEA WAYBILL
 Deals with sea Waybills as stated in former Article 24.
Analysis of Clause 22: CHARTER PARTY BILL OF LANDING
 Deals with charter party bills of lading as stated in former Article 25.
 Allows the possibility of being signed by a charterer or their named agent on
their behalf.
 Port of discharge can be a range of port or geographical location, if stated in
the credit.
Analysis of Clause 23: AIR TRANSPORT DOCUMENTS
 Deals with Air Waybills as stated in former Article 27.

 “An air transport document indicating that transshipment will or may take
place is acceptable, even if the credit prohibits transshipment”. Slight change
to current wording, i.e. covered by one and the same transport document.
90
ROAD, RAIL OR INLAND WATERWAY TRANSPORT DOCUMENT
 Deals with transport documents covering transportation by road, rail or inland

waterways, as stated in former Article 28.
 The question of “who is carrier” is now clarified, especially for rail transport
documents.
 Because of practices by some railway companies (especially those who are
state owned) it allows these transport documents to be valid if signed, without
the need to identify the actual carrier name.
Analysis of Clause 25: -
COURIER RECEIPT, POST RECEPIT OR CERTIFICATE OF POSTING
 Deals with courier receipts and postal receipts and is, in a large part, former
Article 29.
 Certificate of Posting is now introduced.
“ON DECK”, “SHIPPERS LOAD AND COUNT”, “SAID BY SHIPPER TO

CONTAIN” AND CHARGES ADDITIONAL TO FREIGHT
 Deals with “on deck”, “shippers load and count”, “said to contain” and is
based on former Article 31.
 Additionally, remarks with respect to charges being listed, over and above
“freight”, are acceptable, as carried over from former Article 33.
Analysis of Clause 27: CLEAN TRANSPORT DOCUMENT
 Deals with “clean” documents and is predicated on former Article 32.

 The word “clean” need not appear on a transport document, even if a credit
has a requirement for that transport document to be “clean on board”.
91
Analysis of Clause 28: INSURANCE DOCUMENT AND COVERAGE
 Contains all requirements for insurance documents. Formally covered in

Articles 34, 35 and 36.Again, the single article concept is employed.
 The concept of ISBP paragraph 185 is now included in the UCP i.e. can be
signed by an insurance company, an underwriter or their agents or their
proxies.
 Must indicate coverage at least from points A to B as stated in credit.
 Allows banks to accept any exclusion clauses.
EXTENSION OF EXPIRY DATE OR LAST OF PRESENTATION
 Deals with extension of presentation periods and expiry date when such dates
fall on a day on which the bank to which presentation is to be made is closed.
Former Article 44.
 This does not effect the latest date of shipment.
 Expiry/Presentation:
a. If the expiry date of a credit or the last day for presentation falls on
a day when the bank to which presentation is to be made is closed
for reasons other than those referred to in Articles 36, the expiry
date or the last day for presentation, as the case may be, will be
extended to the first following banking day.
b. If presentation is made on the first following banking day, a
nominated bank must provide the issuing bank or confirming bank
with a statement on its covering schedule that the presentation was
made within the time limits extended in accordance with sub-
Article 29 (a).
92
TOLERANCE IN CREDIT AMOUNT, QUANTIY AND UNIT PRICES
 Deals with “tolerances” as stated in former Article 39.

 The word “circa” has been eliminated due to the lack of use of this term in
credits.
Analysis of Clause 31: PARTIAL DRAWINGS OR SHIPMENTS
 Deals with partial drawings or shipments and is largely, former Article 40.
 New section expands the original concept against presentations containing one
or more sets of transport documents and being shipped/carried on more than
one means of conveyance within same mode of transport. This will equal a
partial shipment, even if the means of conveyance leaves on same day.
 In example, two vessels, both leaving port A on 12/12/07, is considered a
partial shipment.
Analysis of Clause 32: INSTALMENT DRAWINGS OR SHIPMENTS
 Deals with installment drawings or shipments and has no substantial change

from former Article 41.
Analysis of Clause 33: HOURS OF PRESENTATION
 The concept that banks are not obliged to accept documents outside their
business hours is continued. Former Article 45(Note: concept has been in
place since 19331).
Analysis of Clause 34: DISCLAIMER ON EFFECTIVENESS OF

DOCUMENTS
 Articles dealing with disclaimers for document effectiveness have been

relocated towards the end of UCP. The concepts of former Article 15 have
remained.
93
Analysis of Clause 35: DISCLAIMER ON TRANSMISSION AND

TRANSLATION
 This is former Article 16

 This article deals with disclaimer on the transmissions of message and/or the
delivery of documents.
 New sub paragraph inserted that deals with compliant documents “lost in
transit” and provides the obligations of the issuing and/or confirming Bank.
 No responsibility for error in translation or the interpretations of technical
terms.
Analysis of Clause 36: FORCE MAJEURE
 This Article deals with disclaimer on “force majeure” and is consistent with
former Article 17.
 Now added “acts on terrorism”.
Analysis of Clause 37: DISCLAIMER FOR ACTS OF AN INSTRUCTED

PARTY
 This article deals with disclaimers for acts/services provided by an instructed

party. Expands former Article 18.
 If charges for beneficiary and cannot be collected or deducted from proceeds,
then Issuing Bank is still liable.
 New rule included that deals with requests of the issuing bank providing
instructions to advising banks to collect their charges upfront, from
beneficiaries, prior to advising.
Analysis of Clause 38: TRANSFERABLE CREDDITS
 This article deals with transferable credits, as reflected in former Article 48.
 New rules provided to close gaps in processing knowledge.
 For instance, discusses what to do in situations where a first beneficiary’s
presentation clauses documents to be discrepant.
94
Analysis of Clause 39: ASSIGNMENT OF PROCEEDS
 This article deals with assignment of proceeds. It is little changed from former
Article 49.
The contents of the chapter enabled researcher to comprehend mechanism of

Documentary Credits and interpretative analysis of clauses to identify discrepancies in
compliance of the clauses. As one of the findings of the pilot survey was that parties
to the trade interpret clauses in arbitrary manner and misinterpretation of the clauses
is one of the attributes of noncompliance and disputes.
The succeeding chapter elaborates more on compliance part with the help of
secondary data in the form of insight stimulating cases and primary data in the form
of interview of focus group and survey as part of the exploratory study.
One of the objectives of research was “To make critical analysis of trade
settlement methods with special reference to Documentary Credit” The first part of
the objective i.e. critical analysis of trade settlement method is well covered in the
preceding chapter. The present chapter fulfills the later part of the objective with
focus on Documentary credit as a trade settlement method.
95

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CHAPTER – V

ANALYSIS OF DOCUMENTARY CREDIT METHOD

5.1 VARIOUS STEPS INVOLVED IN OPERATIONS OF

5.2 UCP 600 AND DOCUMENTARY CREDITS: AN ANALYSIS

CHAPTER V: Analysis of Documentary Credit Method with

In the preceding chapter the researcher has made comparative analysis of

In view of this the researcher, considered it necessary to probe further into

The organization of the chapter is as follows:

I. To study the various steps involved in operations of Documentary Credit

II. UCP 600 and Documentary Credits : An Analysis

5.1 To Study the Various Steps Involved in Operations Of Documentary

A. Flow Chart of Letter of Credit

B. Description of various steps involved in Letter of Credit

C. Advantages and Disadvantages of LC

D. Types of Letters of Credit

A. Flow Chart of the Letter of Credit Mechanism:

The very mechanism of Letter of Credit, along with roles and

Definition of Letter of Credit:

As per clause number 2 of Uniform Custom Practices for Documentary

“Any arrangement however named/ described whereby the banker (Issuing

All above in simple terms means “Banks conditional undertaking to make

A. Description of various steps involved in Letter of Credit

Accordingly exporter who is a beneficiary of credit requests importer to open a

The LC opened is to be forwarded to beneficiary. However the LC opening

If an advising bank takes an additional responsibility of effecting payment

The above confirmation is asked of by the exporter when he doubts the

The LC so received duly confirmed /authenticated is taken up by the exporter for

In simple terms negotiation means bill discounting or financing of export

Whether negotiated or otherwise documents are received at the counters of the

iv. Banker is returning the documents

Now if documents are in order then following procedure is required to be

D/P and D/A procedure:

B. Advantages and Disadvantages of LC

a. The Letter of credit is a commitment to importer and exporter in the sense

c. The LC mechanism is such that exporter would get payment if documents

a. In the whole process of LC mechanism the banker deals in documents and

c. The commitment charges are relatively heavy as compared to the other

d. The LC mechanism do not give any protection to either parties in covering

C. Types of Letters of Credit:

1. Revocable/Irrevocable Letter of Credit:

1. Revocable/Irrevocable Letter of Credit:

As against this irrevocable credit is the one which cannot be revoked

In practice it is observed that original terms and conditions are

From exporters point of view irrevocable credit is most favorable. The

2. Sight and Usance Letter of Credit:

The Sight Credit is also known as Documents against Payment DP

It is clear that such bifurcation is based on whether goods are sold on

3. Confirmed/Unconfirmed Letter of Credit

The letter of Credit in simple terms is defined as “conditional commitment to

Suppose LC of one million dollar is opened by very small bank. It

Generally advising bank becomes a confirming bank otherwise rarely

In case of confirmed LC’s documents would be scrutinized by the

The confirming bank on making payment would claim reimbursement

4. Red Clause and Green Clause Letter of Credit:

The other name given to Red and Green Clause LC is “Anticipatory

The name anticipatory means in anticipation of shipment and

5. Transferable Credit and Non Transferable Letter of Credit:

Transferable credit as the name suggests indicates that the original

6. Back to Back Letter of Credit:

As the name indicates one credit i.e. principle credit is backed by or

In cross border trade transactions the exporter may not be a

As name implies in this credit it is obligatory to draw Bill of Exchange

In this credit the negotiations are restricted to a specified bank authorized